Whilst going concern is concerning, insolvency needs immediate solving – every audit of a company involves a mandatory assessment of the going concern position. Something that is often misunderstood, is that this is a different concept from assessing a company for trading when insolvent.
Insolvency is the inability to pay your debts as and when they fall due. To continue to trade whilst insolvent is an extremely serious breach of law that carries significant penalties. Indeed an auditor that has reasonable grounds to suspect that a company is trading insolvent must inform ASIC of the matter as soon as practicable.
A going concern assessment is a different matter, and the difference is important. Whilst insolvency does render a company unable to be a going concern, so do many other factors. This is because to be a going concern, you must continue in operation without any intention or necessity to liquidate or otherwise wind up your operations for at least the next 12 months. Many factors might cause a company to liquidate or wind up other than insolvency. The following factors are also indicators that a company may need to wind up:
- irreplaceable loss of employees essential to successful business operation;
- critical failure of a business’ supply chain;
- loss of a licence, franchise or qualification without which a business cannot continue to operate; and
- withdrawal of financial support by lenders.
In the case of insolvency, you must consult your accountant immediately. Should the company be solvent but decide to voluntarily wind up, this will have implication for your audited financial report. You can expect:
- all assets and liabilities to become current;
- significant changes to your accounting policies disclosed in the financial report;
- assets to be measured at realisable value rather than at cost; and
- costs and revenues anticipated from the wind up to be brought to account.
Insolvency is an immediate and pressing issue for any business and your accountant’s involvement is a must. If your business is a reporting entity and you anticipate winding up in the foreseeable future, planning will be required to ensure you report in accordance with your company’s reporting requirements.
Michael Cooper, Director
Optima Audit, March 2015